75% of Businesses Fail to Sell - Why QoE Reports Matter

Jeff Silver reveals the critical but often misunderstood world of Quality of Earnings (QoE) reports and their make-or-break impact on business transactions. As the "language of a transaction" and "storybook of the company," QoE reports normalize financial performance over 2-3 years plus trailing twelve months to establish true recurring EBITDA and free cash flow—the foundation of business valuation.

The episode exposes a shocking reality: only 25-30% of businesses that go to market actually close, and even more disturbing, only 5% of sellers are truly happy with their deal after the first year. Jeff explains how inadequate financial preparation creates the "element of surprise" that destroys deals and valuation.

Through real-world examples, Jeff demonstrates how percentage of completion accounting can derail contractor deals. He shares cases where his team pulled out millions of dollars in misallocated revenue from trailing twelve-month periods, revealing how poor communication between project managers and CFOs creates valuation disasters. In one dramatic example, a $20 million two-year construction project showed 40% completion in the first 18 months but 60% completion in the final six months—a red flag that required extensive correction.

The conversation reveals the 60/40 split in QoE work (60-65% buyer-side vs 35-40% seller-side) and explains why sophisticated buyers always conduct their own due diligence regardless of seller preparation. Jeff emphasizes that buyers won't pay more when they discover positive adjustments but will absolutely retrade when they find problems.

Key insights include the importance of sellside QoE reports to avoid retrades, the 4-5 week timeline for completion, and costs ranging from $35,000-$60,000. For smaller companies unable to afford full QoE reports, Jeff recommends "defensive engagements" including revenue recognition analysis and proof of cash procedures.

The discussion covers critical preparation strategies: maintaining clean financials for 3-5 years, understanding working capital mechanics, building comprehensive data rooms, and assembling the right advisory team. Jeff's core message to business owners is preparation—don't wake up one morning deciding to sell without months or years of advance planning.

Through candid insights from a 25-year friendship with host John Marsh, the episode provides both technical expertise and practical wisdom for business owners seeking successful exits without regret.